ISM Services Falls to Weakest Level Since 2016

After a steady opening, the major U.S. stock indexes plunged to their lows of the session on Thursday following the release of the third disappointing economic report this week.

In the cash market, the benchmark S&P 500 Index plunged 0.7%, the blue chip Dow Jones Industrial Average fell over 200 points and the technology-driven NASDAQ Composite lost 0.8% as investors shed risky positions on growing fears of a U.S. recession.

The Report

The Institute for Supply Management (ISM) said its reading on the U.S. services sector fell last month to its lowest level since August 2016. Earlier this week, the ISM posted its weakest reading on the manufacturing sector in more than 10 years, fueling fears of an economic recession.

The closely watched ISM Non-Manufacturing Index came in at 52.6, compared to an expected reading of 55.3 from economists surveyed by Dow Jones. The report for August came in at 56.4. The new reading represents continued growth in the non-manufacturing sector, but at a slower rate.

The Non-Manufacturing Business Activity Index decreased to 55.2 percent, 6.3 percentage points lower than the August reading of 61.5 percent, reflecting growth for the 122nd consecutive month.

The New Orders Index registered 53.7 percent, 6.6 percent lower than the reading of 60.3 percent in August.

The Employment Index decreased 2.7 percentage points in September to 50.4 percent from the August reading of 53.1 percent.

The Prices Index increased 1.8 percentage points from the August reading of 58.2 percent to 60 percent, indicating that prices increased in September for the 28th consecutive month.

What it Means

Commenting on the ISM Non-Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said, “A disappointing service sector PMI follows news of a lackluster manufacturing and means the past two months have seen one of the weakest back-to-back expansions of business activity since 2009, sending a signal of slower GDP growth in the third quarter. The surveys are consistent with the economy growing at a 1.5% annualized rate in the third quarter, with forward-looking indicators suggesting further momentum could be lost in the fourth quarter.”

How the Markets Reacted

Stocks initially plunged on the ISM news, but are rebounding after bargain hunters stepped in to stop the price slide.

Treasury bonds rallied, driving yields lower as investors priced in an October rate cut by the Federal Reserve.

Lower yields made the U.S. Dollar a less-attractive investment, driving it lower against a basket of currencies. The drop in the dollar helped drive dollar-denominated gold higher.